Seeing that the skivers over at irisheconomy.ie seem to have taken a few days break, this is a brief entry on recent revelations about the lead-up to the application for a bailout byIreland in November, 2010.
First up, we had a BBC Radio 4 programme from Irish Times economics editior, Dan O’Brien broadcast today. It’s 30 minutes long and can be accessed at the BBC here. This blog operates using proxy masking software so I can’t tell if the programme is available outside the UK but if it isn’t you can fool the BBC into thinking you’re in the UK by using free proxy masking software like this. The programme was called the “Bailout Boys go toDublin” and is a quick run-through of the events which led up the application for a bailout on 28th November, 2010. Dan interviewed, amongst others, former Minister for Finance Brian Lenihan, Central Bank ofIreland governor Patrick Honohan as well as the usually taciturn Ajai Chopra, the deputy director of European operations at the IMF who has come to represent the face of the IMF’s bailout inIreland. There isn’t much that is new in the production but it does confirm the pressure brought to bear by the ECB to apply for a bailout – “Ireland needed to be totally nailed down” was the ECB view according to Brian Lenihan. It is not clear why the programme was given the title it was, but the ECB comes across as “bully boys” in the piece which might have been the association Dan was seeking to make. One new piece of information was about a letter sent by the ECB to then-Minister Lenihan in November (from 6:00 in, on the programme)
Dan O’Brien says “Finance Minister Brian Lenihan has told us – in fact – that he had received a letter from the Jean-Claude Trichet President of the ECB on the Friday (12th November, 2010). And so before those government denials. In it he says the ECB spelt out its concerns about the amount of money it was owed by Irish banks and suggested that the country should be looking at applying for a bailout” and then Minister Lenihan says “Mr Trichet wrote to me. He raised the question about whetherIrelandwould be participationg on a programme at that stage. I rang Mr Trichet after receipt of the letter. But it was clear to me that there was a serious issue forIreland. I said that it was important we discuss his concerns and we agreed that on the following Sunday there would be an official level discussion about these issues inBrussels”
There is an emerging narrative that it was the ECB which strong-armed the Irish government into applying for a bailout. Secondly, in the Irish Sunday Independent today Colm McCarthy claims that the ECB may have effectively, if not intentionally, prompted a bank run in the lead-up to the application by the Irish government for aid. The letter referred to above might shed more light on the tone and degree of pressure being applied.
Taking a step back from the details of the bailout, the reason the ECB’s position is relevant is that it is the ECB that is stopping Irelandfrom forcing bondholders with €36.5bn of bonds in insolvent Irish banks – banks which depend on the support of funding from citizens via the bailout – from taking haircuts. But is the ECB providing a premium service to Irelandin return for a commitment not to “burn” unguaranteed senior bondholders? After all, Irish banks are in receipt of some €117bn (at the end of March 2011) from the ECB which only charges the banks 1.25% for accessing these funds so doesn’t Ireland owe some debt of gratitude to the ECB? Absolutely not – in return for this €117bn of funding, the ECB is provided with collateral by the banks and the ECB has high standards for the collateral it will accept, set out in some detail here. So all the ECB is doing is its job and no more.
This issue was touched upon on here, two weeks ago & it seems lamentable that there hasn’t been any challenge fromIreland about the ECB’s apparent extortionate threat to withdraw its role as lender of last resort. Although membership of the euro constrains our monetary policy, membership was also supposed to give us a colossus of a central bank inFrankfurt to provide a lender of last resort service. So as long as the assets in Irish banks were eligible then the ECB had to, that is, didn’t have discretion, provide liquidity funding to those banks. There seems to be an acceptance inIreland that we are somehow getting a premium service from the ECB in it providing a lender of last resort service – this isn’t the case at all, it is the role of a central bank to provide a lender of last resort service on eligible assets. But in return for this perceived premium service, we have promised, in return, not to burn bondholders. If we hadn’t joined the euro and relied wholly on the Central Bank ofIreland, I cannot imagine that institution demanding that bondholders in insolvent Irish banks be repaid with funds provided by Irish citizens, in return for providing a national lender of last resort service.
NAMA Wine Lake 